Introduction 

India is considered to be a truly emerging market in the world at the moment. A major part of this growth is fuelled by the micro, small and medium enterprises of the country. The SME sector contributes over 40% of the total GDP and remains a critical source of employment for India’s growing population. Recognizing the importance of SME growth in the post-demonetization era, the government has started many business-loan schemes for the same. Along with this, start-up businesses also have the option of going for loans from a private lender.

Which is the best way for start-up businesses to secure loans? 

The best option for start-up businesses to secure a business loan is to approach a bank or NBFC. However, before you approach a lender, you need to be aware of the various types of start-up business loans, their features, eligibility criteria, and documents required to simplify the process. In this guide, you can find all that you need to know about start-up business loans so that you can choose the right loan product that best fits your needs. 

Types of Loans for Start-up Businesses

Here are some of the common categories of loans available for start-up businesses in India.

MUDRA Yojana - Mudra scheme is most popular among the youth of India. Micro Units Development and Refinance Agency (MUDRA) loan scheme is a Government initiated scheme which is categorized under 3 loan schemes named as Shishu, Kishor and Tarun. Under Mudra’s Shishu scheme interested applicants can get a loan up to Rs. 50,000, whereas under Kishore scheme the amount ranges between Rs. 5 lakhs to Rs. 10 lakhs. It is up to Rs. 10 lakhs if the applicant opts for Mudra’s Tarun loan scheme.

CGTMSE Scheme - Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) is another Government initiative that offers funding to MSMEs via financial institutions like banks and NBFCs. Under this scheme, first-time entrepreneurs and startup enterprises are majorly benefitted. The loan offered under CGTMSE scheme is collateral-free.

Line of Credit - A start-up business loan in the form of a line of credit is somewhat similar to a credit card. However, the card is tied to the individual’s business instead of their credit. Under this category of loan, customers will have no obligation to pay interest on the borrowed sum for the first nine to 15 months, thereby making it easier to cover expenses whilst getting their business to a good start. The interest after the period will rise to anywhere between 7.9% and 19.9%, but the customer will only have to pay interest on the sum they use (similar to a credit card).

Equipment financing – As part of equipment financing, the equipment bought at the time of starting the business, is kept as collateral with the bank. This enables the lender to charge a relatively low rate of interest with a slightly higher risk. The borrower is expected to repay the loan amount used to purchase the equipment using revenues generated from their business. The main benefit of equipment financing loans is that the depreciation of the equipment can be used by the customer as a tax benefit for many years.

Growth Capital and Equity Assistance Scheme by SIDBI - Entrepreneurs can also avail this unique loan from banks. Many banks and financial institutions offer loan schemes that are specifically designed to fund start-ups and their special needs. Different banks may assign different names for these Start-up Business Loans. 

For instance, SIDBI offers “Growth Capital and Equity Assistance” schemes that can be used for purposes like business expansion, buying machinery, purchasing raw materials, marketing, brand building, creation of distribution network, R&D, software purchases, etc. Similarly, several other banks provide funding for start-ups.

Advantages of Start-up Business Loans

A business loan from banks can be advantageous in many ways, as compared to availing funds from some other financial institutions. Top benefits of start-up business loans are:

  • New entrepreneurs are granted tax relief for 3 years.

  • Funds from venture capitals are quite expensive for a start-up. Generally, investors of venture capital ask for as much as 5 to 10 times on the return on their investment. However, a bank loan does not require any equity dilution and the rate of return to the bank is fixed at a nominal interest rate.

  • Banks are easier to approach. With plenty of commercial banks available in India, it is simpler to approach your local banker and request for funds.

  • Banks in India have an established and well-structured framework for processing the funding request of entrepreneurs. Therefore, loan requests will be processed more quickly compared to capitalist investors.

  • Another advantage is that the profit (as well as the loss) of the business belongs only to the borrower.  Borrowers are not answerable to the bank about the profit and loss of their businesses.

Eligibility for Start-up Business Loans

  • The start-up business should have a detailed and convincing business plan

  • It must be formed as a private limited company or a limited liability partnership

  • The total turnover of the firm should not exceed Rs. 25 crores

  • The company should have approval from the Department of Industrial Policy and Promotion (DIPP)

  • The start-up must get patron guarantee from the Indian Patent and Trademark Office

  • The company must have a recommendation letter by an incubation

Additional Reading: Government Loans for Small Business Startup in India

Documents Required to Apply for Start-up Business Loan

Photographs

2 copies (passport-size)

Proof of Identity

PAN Card, Passport, Aadhaar Card, Voter’s ID, Driving License

Address Proof

Passport, Driving License, Aadhaar Card, Postpaid Phone Bill, Voter’s ID

Age Proof

Passport, PAN Card

Bank Statements Last six months
Proof of Income

Income Tax Returns, Salary Slips,

Signature Proof

Bank verified signature, PAN Card, Passport

IFSC Code Proof

Cancelled/scanned cheque, copy of passbook’s front page of the same bank account

 

End Note

Applying for start-up business loans is easy and hassle-free. Most financial institutions and banks also have an online application process for applicants. Applicants can visit the official website of the lenders, fill-up the form provided, and upload required documents. There is also an option of visiting the nearest branch of the lender and submitting the application form and documents in the physical form. Once the details and the verification are complete, the applicants will receive the loan amount directly into their bank accounts.